Florida Corporations Flashcards
Corporation Basics >
1) Nature of Corporate Entity
2) Duration of Corporation Existence
3) Lawful Activity for Corporations
1) A Corporation is treated as a separate legal entity distinct from its shareholders. It generally may exercise through its agents the same rights and privileges as a natural person.
2) Corporations can exist forever as long as they pay their annual report fee.
3) Can do anything that is lawful to carry out their purpose. Usually it is non-profits that can’t do certain things.
Forming a Corporation > Articles of Incorporation
Articles of Incorporation (+ attached fees and signatures) are filed with the Secretary of State of Florida.
* The corporation comes into existence the instant this is filed.
Forming a Corporation >
1) Required Information on Articles of Incorporation
2) Permissive Information on Articles of Incorporation
1) The Articles MUST state:
a. Corprations Name
* Name cannot be misleading.
* Must end in Corporation, Incorporated, Company (or) Corp., Inc., Co.
b. Names and addresses of the incorporators
c. Registered Office Address
d. Principal Office Address
e. Name of Registered Agent
* and their written acceptance
f. Number of shares authorized and Classes of stock authorized
* preffered: first dibs on dividends, no voting.
* common: voting rights
g. Preemptive rights, if any
2) Permissive Information: Articles of Incorporation, like the constitution, are harder to amend then say, the bylaws of a corporation. Thus, may want to include:
* number of directors
* par value of stock *
* personal liability on shareholders to a specific extent and on specific conditions.
* initial purpose of corporation
anything not inconsistent with Fla. statutes governing corporations
par value of stock: Corporation can never issue stock for less than this, or else “watered stock” issue - directors liable)
Forming a Corporation > Defective Formations
De Jure Corporation
* Perfectly formed corporation, no errors
De Facto Corporation
* Factual corporation, not yet a “Legal” corporation.
* Triggered by a good faith attempt to incorporate and something trivial went wrong.
* Will still be protected as if a corporation. State will force correction of the mistake.
Corporation by Estoppel
* Equitable doctrine.
* Corporation not formed but people running the corporation honestly and reasonably believed that a corporation was formed. Parties acted as if there was a corporation.
* If a person or entity wanted to sue this corporation, the person suing will be estopped from denying existence of that corporation even though it legally does not exist because Parties acted as if there was a corporation.
Remember, there is personal liability if the person knows that there was no valid corporation
Forming a Corporation > Promoter Liability
Promoters * are liable for any transaction they enter into even if the document or contract says the corporation will be liable.
* Because the corporation doesn’t exist at the time and both parties know it. (opposite of Corp. by estoppel where both partes believed corp. existed)
The only time promoters are not liable:
* Corporation and the creditor entered into a “novation” (new contract from old obligations)
Promoters: Someone who tries to promote the creation of a corporation by getting investors together to raise money to help create the corporation. Can sometimes be the same people who start the corporation, not always.
Stocks (Shares) > Capital Structure of Corporations
2 ways in which a corporation finances its obligations:
1) Debt Instruments: X gives Corporation $10,000. Corporation gives X a corporate bond, a promise to pay back (plus interest)
* Bond/Debt financing gives NO ownership rights to anyone.
* Only thing a bondholder has over a shareholder is in bankruptcy and liquidation. Debts get paid to creditors before remaining assets are distributed to SH’s
2) Equity Instruments: Buying ownership into the corporation. Equity is then given by giving out stock (shares).
* These shareholders now are owners of the corporation in proportion to how many shares they own. 100 shares total, 20 shares bought = 20% ownerhsip
* Shareholders have rights to manage the corporation through an election process
Stocks (Shares) > Preemptive Rights
Preemptive rights give existing shareholders the right, but not the obligation, to purchase their proportionate share of the new issuance of shares before anyone else in order to maintain their percent ownership interest.
* If you want this, you must state it in the articles of incorporation.
Example:
1) Corporation has 100 shares
* A buys 50 shares = A owns 50%
* B buys 50 shares = B owns 50%
* Great!
2) Corporation (board of directors) now decides it needs more money, so it amends the articles of incorporation to increase the authorized shares to 150 shares.
* This is not good for A because they would become 33% owners.
3) Premptive rights would give A the opportunity to purchase 50% of the 50 additional shares = 25 shares
* A would now have 75 of the 150 shares, maintaining their 50% percent ownership interest in the corporation.
If you want this, you must state it in the articles of incorporation.
Stocks (Shares) > Distribution to Shareholders
(aka “Dividends”)
Profits from corporation > shareholders
Decision to issue dividends is a matter exclusively reserved for the Board of Directors
2 tests that give the board of directors a presumption of correctness when distributions are made. Essence of both of these tests is that a corporation cannot pay out more money than what the corporation needs to run their business:
* equitable solvency test
* modified balance sheet test
Stocks (Shares) > Transfers of Stock and Right of First Refusal
Shares are freely transferable *
Restrictions must be reasonable and conspicuous.
* Reasonable: total refusal or bar on transfer is unreasonable
* Conspicuous: put somewhere where someone can see it. Usually on the certificate/stock itself
Right of first refusal: Type of restriction giving corporation the chance to buy shares first before selling to someone else. Reasonable.
This is what makes a corporation a corporation
Stocks (Shares) > Stock Subscription Agreements
Subscriber agrees to purchase a certain number of shares at a certain price point.
Bar will test on 2 things:
1) Revocable?
* Irrevocable for 6 months
2) What qualifies as consideration?
* Anything that the board of directors finds adequate.
* can be cash, promissory notes, past service, contracts, IOU’s
Shareholders > Shareholder Powers
ONLY powers to VOTE for
Board of Directors and Corporate proposals
* Amending Articles of Incorporation
* Merging or Dissolving the Corporation
Can only vote at Shareholder Meetings
ZERO power to run the Corporation!
Shareholders > Shareholder Meetings (2 types)
1) Annual Meeting: Once every 13 months
* Must give Shareholders 10 days notice!
2) Special Meeting: As the Circumstances Warrant
* Must give Shareholders 10 days notice!
* For meeting to be valid, at least half the voting shares (quorum) must be present. (100 = 50) SH’s could send in a proxy to vote on their behalf.
* To get something to pass, need majority vote of present voting shares at the meeting. (26 of 50 votes)
1st Q you want to ask yourself: was the action properly taken? (at a shareholder meeting)
Shareholders > Cumulative Voting
Optional Voting System when the shareholders are voting for Board of Directors.
Solves the problem with straight voting (1 share = 1 vote) where shareholders could not compete with owners who have much more shares
Number of votes = number of shares X number of open seats
* 10 shares, 8 open seats on the BOD = 80 votes
Shareholders > Shareholder Rights to Dividends
NO rights to dividends.
* Decision to issue dividends is a matter exclusively reserved for the Board of Directors
* Protected by Business Judgment Rule. (Courts will not second guess rational, informed, good faith decisions over which reasonable persons could have differed)
Shareholders >
1) Shareholder Voting Trusts
2) Shareholder Pooling Agreements
1) Shareholder Voting Trusts: (trust)
Pooling shares into a trust, under the control of one person, a trustee, who exercises power of the vote in accordance with the trust document.
* A trust is created where the shareholders transfer, as res (property in trust) their shares. This transfer is irrevocable. To be managed by the trustee. Shareholders tell trustee what they want them to do with their shares voting wise.
* Shareholders get back a “voting trust certificate” That says their percentage of ownership. Can trade this with other people to entitle them to any dividends from the stocks.
* if dividends are issued to the stocks, the trust receives the dividends. The trust has to distribute them to people who created the trust and people who have a voting trust certificate.
2) Shareholder Pooling Agreements: (contract)
Shareholders contractually agree to vote a certain way with all the shares in the agreement
* in writing and signed
* will bind subsequent owners of the shares if they indicate they are bound (transferability restriction requirements)
Both accomplish the same thing pretty much – one by trust, one by contract
